Investing For The Benefit Of Minors – Some Practical Considerations

 In Tax, Trusts

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Information in this article should not be taken or relied upon as personal financial advice. Any individual requiring information or advice on their own specific circumstances or on their own account should contact a suitably qualified professional.

investing money for minors


Two significant issues arise when investing a fund to provide for minors:

  • potential taxation
  • running costs

both of which can act to severely diminish investment returns.  Each are a challenge.  Picking the right investments based on the liquidity required, the time period before distributions are anticipated and the trustees’  interpretation of their duty to make returns for an acceptable level of risk are separate issues.  What follows are some basic pointers on likely costs and the potential tax complications.

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Grandparents, god parents and occasionally aunts and uncles will often want to pass on some of their wealth to children and young people.  “Generation skipping” is a commonplace approach used by financial planners in minimising potential Inheritance Tax.

Most significant gifts will be into trusts so as to control access to the funds at least until the proposed recipient is age 18 and often beyond that.  There are two options that will not be dealt with in this article: the use of Junior ISAs (and the now closed Child Trust Funds) which have specific rules resulting in full access at age 18 and the use of pension policies funded from the donor’s surplus income which in stark contrast defer access to age 55.

Frequently, individuals with more capital and/or income than they need and a foreseeable Inheritance Tax liability will want to give wealth to minor children and will be advised to set up a trust, which will generally be caught by the relevant property rules, as using a bare trust will not allow the desired level of control after age 18.  Lawyers will have their own preferred approach to each situation and probably some idea of a “de minimis”  level at which the associate costs are justified by the potential tax savings and desire for ongoing control of the assets.  On the other hand, where the trust arises from a will, the executors have not much say in the amount of the legacy they are expected to invest!


Whenever trustees have to account for tax, they will likely need professional advice as the rules are not straightforward and the “right” investment approach in terms of assets selected may turn out to result in heavy additional costs preparing tax returns and documentation for quite small sums of income and gains.  Using the right investment structure is very important or professional costs will add further to what may be unnecessary tax bills for minors and diminish overall returns significantly.

Beneficiary Is Tax Payer

If the trust is such that the beneficiaries will be the tax payers (for example, there is an interest in possession but s.31 Trustee Act 1925 is excluded or modified) and the recipients of income are minor children, it is a sensible objective that no tax will ultimately be payable.  However some investments will have tax applied internally that cannot be recovered, life assurance bonds for example, and that may mean the beneficiary is having the investment return taxed at something like basic rate even though they are a non-tax payer.

Other investments such as income yielding collective funds (OEICs) may be deducting basic rate tax at source on interest income and distributing yield from share dividends that have a tax credit that cannot be recovered.

The need to provide documentation and submit reclaims for tax paid at source will add significantly to the relative costs of running trusts with modest assets (say under £50,000).  Simplicity in the investment structure is the key to keeping cost down.

Trustees Ire Tax Payer

In this case the tax regime can be exceptionally harsh with currently  50% (45% from 6/4/13) tax payable on income above the modest tax free allowance and 28% tax on capital gains above the annual exemption.  In such a situation tax free investments such as National Savings products may on the face of it look attractive.  However, when interest rates on deposit funds are very low, other options must be considered or the overall returns after trustee expenses may be negligible  or even negative in smaller trusts.

If income is to be distributed, the full complexity of the rules comes into play and choosing investments to simplify things and minimise the accountancy work required is important.


Financial products always have costs at up to 3 levels:

The Issuer Costs

This is always applicable but may not be explicit.  For example, a building society account pays a rate of interest net of the society’s desired margin, but there is no way of knowing what that is.  With insurance and investment company products, it is now almost always possible to see the cost of providing the “wrapper” for the money and it will be between 0.25% to 0.6% per annum in most cases. With stockbrokers, a portfolio administration fee is usually quoted as part of the management fee (see next item) but may be explicitly stated as well.

The Investment Management Costs

Under FSA regulations this is a cost that must be disclosed and from 2013 will in a majority of situations be “unbundled” from other fees, although it will be a while before existing investments  are brought under the new rules.

Typical management fees are from 0.2% per annum for simple index tracking investments to as much as 1.25% per annum for sophisticated hedge fund type investments.  Under this heading also falls acquisition cost (or spreads) when first buying the investment.  From 2013 these will no longer include adviser commissions and in many cases with investment funds there will be no spread, but buying and selling shares, including Exchange Traded Funds (ETFs) and investment trusts directly will always involve a spread cost of some sort.

Of course, simple deposits and National Savings products do not require management so do not carry this cost element.

Adviser Fees

These are optional for the public in general but not for trustees, unless they can demonstrate that they have themselves the necessary skills to satisfy the legislative obligations.

Most advisers charge percentage fees, both for initial portfolio propositions and tax advice and for annual or more frequent reviews.  A typical set up fee will be 3%, discounted for larger investments and annual fees are in the range 0.5% to 1%, again discounted for larger portfolios.

Some advisers charge hourly rates and fixed review fees, optionally paid as a recurring retainer.  Hourly rates for Chartered Financial Planners will be comparable with solicitors, but should be less for advisers with basic qualifications.    Fixed fees are usually much better value for larger portfolios.

A few advisers will have supplementary specialist investment qualifications like the Investment Management Certificate, or be qualified members of STEP, or have other taxation related expertise.  These more expert advisers will probably charge higher rates, but the market is about to become very competitive following the changes of the Retail Distribution Review (RDR).

The moral of the story is don’t put small amounts of money into Trusts.

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